Commentary

What happens to oil if Chavez goes?

SAN FRANCISCO (MarketWatch) — As Venezuelan President Hugo Chavez’s health worsens, uncertainty surrounding his regime and control over his nation’s oil is on the rise.

News reports Friday said the ailing Chavez is fighting a lung infection and suffering from respiratory failure following cancer surgery in Cuba last month. Chavez is due to be inaugurated on Jan. 10 to a new presidential term.

And while he’s been the nation’s leader since 1999, he hasn’t been able to make the most of Venezuela’s vast oil reserves.

“Venezuelan [oil] production has suffered under Chavez,” said Phil Flynn, senior market analyst at Price Futures Group. He “ruined the Venezuelan oil industry by breaking contracts with oil companies and taking money out to fund his socialist revolution … production has fallen far short of what it should have been.”

Data show Venezuela produces around 2.2 million barrels of crude oil per day, down from almost 3.5 million when Chavez took office in 1999, according to James Williams, energy economist at WTRG Economics.

Reuters

A Venezuelan oil worker hangs a banner against Exxon Mobil during an event with President Hugo Chavez to celebrate victory over Exxon in Caracas March 24, 2008.

Venezuela remains the fourth-largest U.S. supplier of imported crude oil and petroleum products and had net oil exports of 1.7 million barrels per day in 2010, the eighth-largest in the world, according to the U.S. Energy Information Administration.

But U.S. imports from Venezuela have declined in recent years, with the U.S. importing 951,000 barrels per day of crude oil and petroleum products in 2011 from the nation — a mere 8.3% of total American imports, the EIA said, adding that the “significance of Venezuela to the American energy sector is in decline.”

Chavez mandated majority PDVSA ownership of all international oil projects and in 2006, he implemented the nationalization of oil exploration and production in the nation. And statistics show that Venezuela’s petroleum exports have dropped by nearly 50% since peaking at 3.06 million barrels per day in 1997, according to the EIA.

Chavez fired a large percentage of PDVSA workers who did not support him and, as a result, the state-owned oil company had “neither the funds nor the talent to maintain production,” said Williams. “He compounded the problems by seizing assets of foreign oil and service companies that were major contributors to Venezuela’s production growth in the past.”

Scenarios

A change in power for Venezuela, on the other hand, wouldn’t automatically be a good thing for world oil markets, analysts said.

In a more “favorable economic and political environment,” many of those workers and companies may return, Williams said, though that environment “would not be much improved were Vice President Nicolas Maduro to become his successor.”

Still, Williams expects Venezuela to have a new president by the spring.

“The upside oil price risk is the transition of power,” he said. “If it comes without violence, there will be no impact [to oil prices], but a loss by Maduro could easily be accompanied by civil unrest.”

Short term, “the sheer uncertainty could provide some support to prices, as uncertainty in any big supply nation has a habit of doing,” said Matthew Parry, senior oil-market analyst at the Paris-based International Energy Agency.

Then again, the market could shrug this off and focus on the fact that long term, the world market may see additional oil supplies from Venezuela, he said.

“With all else being held equal, additional Venezuelan capacity would equate to a looser market balance and, hence, lower prices,” said Parry.

But WTRG’s Williams said there is “little chance that Venezuela poses any downside risk to price.”

Unless there is a 50% increase in drilling activity, the Organization of the Petroleum Exporting Countries has little to fear from over production by Venezuela, he said.

A significant increase in the nation’s production would require a rig count in excess of 100 rigs, he explained. “For this to happen, the Chavez policy of using PDVSA funds for social work and limiting capital investment in new production would have to be reversed. This is unlikely in the short term,” Williams said.

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